American loses a court ruling to the pilots. Sortof.

After seeing the pilots soundly reject the most recent contract put to a vote American Airlines turned to the courts to discover their future. By failing to achieve a negotiated agreement both sides were left to rely on the Court to decide if the company could reject the existing contracts and impose a new term sheet on the union. Historically the companies have mostly been successful in these claims so it was quite a surprise when the ruling (warning: 111 page PDF!) came out late Wednesday afternoon with this line:

…[T]he Court finds that American has not shown that the proposal is necessary as required by Section 1113. For the reasons set forth above, therefore, American’s Motion to reject the collective bargaining agreements of the APA is denied.

Yup, the pilots won. Sortof.

It turns out that of the many changes the company is seeking to implement, some more significant than others, only two were rejected by the Court. And of the two, one is quite unlikely to actually have any impact on the pilots anyways. The Court has also given the company three days to file an amended proposal, one that seems quite likely to actually be approved. So what did the pilots actually win?

Well, for starters, they got the AMR executives to admit as part of their testimony that they weren’t really trying to run the business. Rather, they were

“kick[ing] the can” down the road to permit the Company to “limp along” until sometime in the future when there might be increased demand, a benign fuel environment, and a convergence in American’s labor costs vis-à-vis other carriers.

Nothing like just hoping for the best as a business strategy. Sadly, these executives were well compensated for those "efforts."

The testimony also drew out a couple interesting nuggets with respect to competition in key markets. LCCs have been eating American up in a few areas. The San Francisco–Boston market saw a 60% drop in average fare (courtesy of JetBlue) over a 10 year period prior to American dropping the route. And average fares in the Caribbean and Latin American markets have dropped roughly 9% over the past 14 years, again blamed on LCC competition.

The LCC’s expansion in the Caribbean and Latin American region has hit American particularly hard because a large portion of American’s revenue had traditionally been generated from this region. (Kasper Decl. ¶ 56 (American’s average inflation-adjusted fares to this region have dropped by approximately 9% between 1998 and 2011 notwithstanding a five-fold increase in the price of jet fuel)).

It is not clear if the term "LCC" in this context specifically means JetBlue or if Spirit Air is also included. Either way, American got beat up pretty badly in those markets and responded by essentially closing up shop.

On the topic of regional carriers, the ability of the airline to outsource some operations to subcontractors, the pilots lost pretty badly. American wants to add nearly 200 regional jets in the 80-90 seat range. The company notes that the only way RJs are truly competitive is when they are large enough to offer a premium cabin to appeal to business travelers and to be efficient from a CASM perspective. These flights would be operated by a regional carrier and therefore the union pilots would lose out. American’s proposal would allow more than 800 RJs in the fleet based on the current mainline fleet size. The Court pretty much sided with the company on this one, finding that the American request is "reasonable and necessary when compared to its network competitors."

The two points where the pilots won cover the furlough policy and codesharing abilities.

American attempted to essentially remove all limitations on the ability to furlough pilots. The current contract permits American to furlough up to 2,000 pilots and their reorganization plan calls for only 400 to be affected. Yet the company wants to remove all restrictions on that front. The court was reasonably decisive on this point, noting that, "While American claims to seek more broad furlough authority to address unforeseen emergencies, there appears to be no need to do so…"

The furlough policy also currently permits a more senior pilot to volunteer in place of a junior pilot. In many cases, according to the company, such moves necessitate furloughing both employees because of the work rules in place. The entirety of the proposed furlough policy changes were rejected but the Court. It will be interesting to see if American tries to get this portion revoked without changing the other aspects of the policy or if they walk away from the issue completely.

Regarding codeshares, the ruling was similarly favorable to the pilots and for similar reasons. Currently only Hawaiian Airlines and Alaska Airlines are permitted as codeshare partners domestically and then with significant limits. Essentially the airline asked for carte blanche to change that without demonstrating the necessity for such a dramatic shift in policy. In rejecting the proposal the Court notes that, "American has not established how its codesharing proposal relates to the showing of necessity set forth in its Business Plan. American’s failure to do so is problematic because of the central role the Business Plan plays in this Section 1113 proceeding…."

The other interesting bit in the codeshare section of the document is some insight into the history of codeshares in the US market. The filing recognizes how the other airlines were forced to maintain strong codeshare relationships in order to compete with the American route network: "In 2006, for example, Northwest had codeshare agreements with various carriers on 709 routes, Delta on 400 routes, Continental on 319 routes, US Airways on 276 routes and United on 196 routes." The ruling also recognizes that these airlines generally are more restrictive on codesharing now due to their growth through mergers. Ironically, American’s attempt to grow the use of codesharing to levels similar to their competition is hampered because the competition generally needs fewer codeshares to compete. So just being comparable actually is not sufficient in this case.

Much like the furlough policy, it is not clear just how much American will back down on on this one. Clearly they cannot have unlimited codeshares both domestically and internationally but it will be interesting to see just how much leeway the Court is willing to grant on this front.

Finally, one other interesting stat which came out of the ruling concerns sick leave. According to the data provided to the Court, "in 2011, the average pilot was paid 78.4 hours of sick leave, more than one month’s worth of flying." That’s a lot. I’m not sure if that includes long-term disability combined with short-term bits or other mitigating circumstances but the number does seem rather high.

So, yes, the pilots won on a couple points. But not enough to really be celebrating right now it would seem. Fixing these couple points shouldn’t cost the airline too much and on the other, more significant points the pilots lost pretty badly. I was quite surprised with the initial ruling. After reading the details, however, it doesn’t actually seem all that shocking after all. We’ll see what happens with the amended filing soon enough.

The pilots took a beating on this one. However, I think it was generally expected that the court would allow the debtor to impose many of the requested terms. I suspect the APA knew this, and expected an unfavorable ruling (indeed, they urged membership to approve). I think the rationale among APA members to reject this was that it’d be better to endure the imposed harsher terms during bankruptcy temporarily rather than agree to a long-term agreement that imposed not-much-better terms for a longer period. APA members I think really believe that a US merger is not far off in the distance, and they view that as a white knight who will give them better terms. It’s kind of foolish, imho, because now AA can operate with the terms it wants, and it has no real urgency to emerge from Chapter 11 until new long term agreements with pilots are negotiated. But now, time is on AA’s side, while the pilots will be suffering.

[…] couldn’t believe that the judge in American’s bankruptcy case wouldn’t actually let the airline reject its pilot contract. But this isn’t some massive victory for pilots – really it’s just a small one. […]